19 Jan 2017

Tightening the Security Belt

New law changes a long-standing approach to the creation, perfection, priority and enforcement of UAE security over moveables.

Registered security becomes broader in scope and further regulated.

Priority of the currently held possessory pledges over moveables will require registration.

Background

The UAE Federal Law No 20 of 2016 comes into effect in mid-March 2017.[1] Subject to limited exceptions, it concerns and will affect the creation, enforceability, priority and enforcement of pledges over moveables (whether current or future, tangible or intangible) as security for the performance of an obligation. The importance of this legal development should not be underestimated.

Advising on local law security over moveables is about to become more interesting. So will the position of parties to UAE onshore secured financing.

Impact

What impact will the new law have? In a nutshell:

Pledges over assets such as trade receivables, bank accounts, commercial papers, and tangible or intangible moveables, which are not covered by the registered mortgage over a commercial business or by possessory pledges, will be registrable by law.

A pledge contract must contain a description of the pledged assets. However, it is not yet clear how detailed the description should be. Banks operating in the UAE that continue the practice of imposing a “market practice” standardised pledge documentation which loosely refers to all and any moveable assets as being the subject of their “security” may wish to rethink such approach.

The case of a security interest over moveables which become real property by allocation[2] is proposed to be addressed by requiring its dual registration: in the register of security to be created pursuant to this law and in the relevant real estate register. The resulting perfected pledge over moveables is then intended to have priority over any security interest over the real property.

Pledges over fungible commodities such as oil are expressly recognised and regulated.

The pre-enforcement notice will not be eliminated, but a secured party may have an opportunity to realise secured moveables at a market price without court action.

In the case of account pledges a set-off will be a recognised course of enforcement action.

The procedure for, including timelines involved in, the enforcement through courts will be clarified and prescribed in detail. The sale process set out in the UAE Civil Procedure Code will not apply in certain circumstances. Execution procedures set out in the new law will also apply in the event of the pledgor’s bankruptcy.

Certain actions, including by the pledgor or the pledgee, as the case may be, such as the intentional registration of a pledge with false detail or in violation of this law, the intentional disposal of pledged moveables in breach of contract or the intentional [unlawful] interference in the execution process, to name a few, will give rise to criminal liability.

Criminal liability will also attach to such parties’ board members/directors, “active” partners and employees where relevant, unless such individuals can prove their lack of knowledge or their objection to the decision taken [to proceed with such an action].

Parties currently holding pledges over moveables by way of possession will have a year from the effective date of the new law to register their priority. Those seeking to create a possessory pledge will first need to establish the absence of registration of a prior pledge on the same assets and its priority.

Conclusion

A number of matters are left to be regulated in further detail by the UAE Cabinet’s Executive Regulations, which are due to be issued by mid-September 2017. By then, the law itself will have been in effect for six months. Until the register is established and pledges start to become accepted for registration under the law, there may be limited comfort that local law practitioners can provide to finance parties that seek first priority enforceable pledges on moveables, which are the subject of this law.

[1] 90 days from the date of its publication in the UAE Official Gazette of 15 December 2016.

This article, including any advice, commentary or recommendation herein, is provided on a complimentary basis without consideration of any specific objectives, circumstances or facts. It reflects the views of the writer which may, in some cases, differ from those of the firm, especially in the developing jurisdiction of the UAE.